Starting early to guide a child to financial independence is a good idea. A brokerage account is an investment tool used to buy and sell investments, such as stocks, bonds, mutual funds, and ETFs. A minor, commonly a person under age 18, may be named on a brokerage account if a parent or guardian opens a custodial account with the child. Under the Uniform Transfers to Minors Act, parents can only use the money in these accounts for the child.
- A custodial brokerage account allows adults to open a brokerage account for minors.
- A child can open a Roth IRA when they start earning taxable income.
- Families often open custodial accounts to help a child save for college.
- Custodial accounts are available at financial institutions such as banks and investment brokerages.
Opening a Custodial Brokerage Account
Parents, grandparents, and family members can establish custodial accounts for minor children. When the child reaches the legal age of majority, commonly 18 or 21, depending on the state in which they live, the ownership of the account transfers to the child.
In a custodial account, the minor owns the assets in the account but the parent has control of investment decisions and withdrawals. Capital gains are taxed in the child's name and not the parent's. This can provide a tax advantage because children often pay little to no taxes due to their low annual incomes. Two types of custodial accounts include:
- A Uniform Transfers to Minors Act (UTMA) account may include works of art, real estate, or even intellectual property, such as royalties from a book.
- A Uniform Gift to Minors Act (UGMA) account can include cash, stocks, mutual funds, or insurance policies.
Minimum account balances and interest rates vary by company. Anyone can contribute to the custodial account. Firms that offer accounts for minors include Charles Schwab, E*TRADE, Fidelity, Merrill Edge, TD Ameritrade, and Vanguard.
Friends and family may contribute up to $17,000 in 2023 free of gift-tax consequences to a child's UGMA/UTMA account. Couples can contribute $34,000 in 2023.
Opening a Roth IRA Account for a Working Child
If a child has started working, earns income, and has filed their taxes, they become eligible to open a Roth IRA account with a parent's help. IRA accounts require that the account owner has earned income, but the contributions cannot exceed the minor's total earnings. Both child and parent can contribute to the account, but the IRS maximum contribution is $6,500 per child for 2023.
How Can a Child Have a Brokerage Account in Their Name?
A custodial account permits a child to own the assets in the account. The parent has control of the investment decisions and any withdrawals which might be made. Withdrawals or capital gains tax liabilities are taxed in the child's name.
What Is the Difference Between a Custodial Account and a Guardian Account?
Parents commonly set up custodial accounts for minor children to help with a child's future educational costs, and these accounts offer some tax advantages. Guardian accounts are established by court order to support the needs of minors or adults unable to manage their money due to mental or physical incapacity.
Can I Make a Minor a Beneficiary of My Retirement Account?
A minor child is considered an eligible designated beneficiary and may choose to take distributions based on their life expectancy or follow the 10-year rule where all assets of the account must be distributed by the end of the 10th year following the year of the account owner's death.
The Bottom Line
Custodial accounts are created in a child's name with a guardian or parent as custodian. Age limits for accessing the accounts depend on the state but commonly range from 18 to 24. Minors cannot open brokerage accounts, but family and friends can help them set up custodial accounts, and when a child begins to earn income, they can open a Roth IRA.